Hedging your bets on Syria

Will the U.S. bomb Syria? If so, will Iran and Russia respond with military attacks on Israel or U.S. targets? Will all this affect your daily life? What should you do about it?

The answer to the first two questions are hard to know, but I would guess that Congress will vote against military action, and President Obama will come up with another way to punish Syria for the use of chemical weapons to save face. For the time being, the uncertainty is driving up the price of gasoline and you might consider hedging the chance that gas prices will rise even more by investing in an energy stock index fund that would rise in value along with the price of oil.

But the uncertainty around Syria is also a teaching opportunity. For example, as a teacher of Strategic Decision Making, it makes me imagine a decision tree that considers a series of possible outcomes, take a guess at how likely these outcomes might be, and estimate how those outcomes might influence the price of oil, and determine how you could invest to hedge against those outcomes.

I realize that these might not be the first things that come to your mind. But let me show you what the decision tree might look like.

At its base would be a question: “Will Congress vote to approve a U.S. strike on Syria?” out of which would spring two sub-branches: “Yes” and “No.”

From each of those two sub-branches would emerge another sub-branch: “Will the U.S. strike Syria?” and from each of those would spring two sub-branches “Yes” and “No.”

What I have read so far suggests that what will happen is that Congress will not vote to approve a U.S. strike on Syria, and that Mr. Obama will use that as a reason not to strike. But by drawing the decision-tree this way, I am thinking that there is a chance he could get Congressional approval and decide not to strike or that Congress could turn him down and he would launch a strike anyway.

Let’s continue building the decision-tree. If the U.S. strikes Syria, two sub-branches could emerge from the decision-tree: “Will Iran strike Israel and block oil tankers through the Strait of Hormuz?” and “Will Russia strike Israel?” with sub-branches “Yes” and “No.” If the answers to these questions are “Yes,” then the price of oil is likely to spike dramatically, due to a cut in the flow of crude oil to refineries. And that would boost the price of gasoline – possibly to as high as $5 a gallon. If you fill your tank once a week, you’d end up paying at least $20 more dollars a week on gasoline. And the higher gasoline prices would start to filter into the price of any consumer product that needs to get sent to a store by truck, train, or airplane.

This leads to the question of what you should do about it. We could even add a branch to the decision-tree “Will you hedge against rising gasoline prices?” with sub-branches “Yes” or “No.” And to the “Yes” sub-branch we could add options – such as “Invest in an energy mutual fund” or “Buy gasoline futures.” If gasoline prices continue to rise after you make those decisions, you might be better off. Alternatively, by the time you made such decisions, the price of gasoline might be fully reflected in the gasoline futures or mutual fund prices – so you would lose money on the hedge.

But let’s explore the possibility that the Congress does not vote to strike Syria, and President Obama decides on non-military way to sanction Syria for his use of chemical weapons. He could give a speech in which he says that “preserving America’s constitutional democracy is more important than punishing Syria militarily, and that he will resort to unspecified other means to punish Syria’s president Assad. Meanwhile, other countries should not assume that they can violate international norms with impunity.”

If that happened, the price of oil and gasoline would gradually ease. And that would save you some money at the gas pump over the next few months – unless a hurricane strikes oil refineries in the Gulf of Mexico or on the East Coast over the next few months.

I am not sure that all the branches of the decision-tree I just described are the right ones. Nor is my guess about the outcomes certain to be correct. But if everyone agreed, there would be no need for markets.

Peter Cohan of Marlboro heads a management consulting and venture capital firm, and teaches business strategy and entrepreneurship at Babson College. His email address is peter@petercohan.com.